Question

Cheyenne Furniture Company started construction of a combination office and warehouse building for its own use at an estimated cost of $15,000,000 on January 1, 2020. Cheyenne expected to complete the building by December 31, 2020. Cheyenne has the following debt obligations outstanding during the construction period.

Construction loan-12% interest, payable semiannually, issued December 31, 2019		$6,000,000
Short-term loan-10% interest, payable monthly, and principal payable at maturity on May 30, 2021		4,200,000
Long-term loan-11% interest, payable on January 1 of each year. Principal payable on January 1, 2024		3,000,000

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Assume that Cheyenne completed the office and warehouse building on December 31, 2020, as planned at a total cost of $15,600,000, and the weighted-average amount of accumulated expenditures was $10,800,000. Compute the avoidable interest on this project. (Use interest rates rounded to 2 decimal places, e.g. 7.58% for computational purposes and round final answers to 0 decimal places, e.g. 5,275.)

Avoidable Interest

$

Compute the depreciation expense for the year ended December 31, 2021. Cheyenne elected to depreciate the building on a straight-line basis and determined that the asset has a useful life of 30 years and a salvage value of $900,000. (Round answer to 0 decimal places, e.g. 5,275.)

Depreciation Expense

$

Answer 1

1) Firstly we need to calculate the Weighted average interest rate for the general loan outstanding during the construction period (i.e. other than construction loan).

Calculation of Weighted Average Interest Rate (Amounts in $)

Loan	Loan Amount (A)	Interest Rate (B)	Interest Expense (A*B)
Short term loan	4,200,000	10%	420,000
Long term loan	3,000,000	11%	330,000
Total	7,200,000		750,000

Weighted Average Interest Rate = Total interest expense/Total Loan Amount

= ($750,000/$7,200,000)*100 = 10.42%

Calculation of Avoidable Interest (Amounts in $)

Construction Loan	(6,000,000*12%)	720,000
General Loan	(10,800,000-6,000,000)*10.42%	500,160
Total Avoidable Interest		1,220,160

Therefore the avoidable interest on this project is $1,220,160.

2) Total interest capitalized = $1,220,160

Total cost = $15,600,000+$1,220,160 = $16,820,160

Depreciation Expense per year = (Total cost - Salvage Value)/Useful Life

= ($16,820,160 - $900,000)/30 yrs = $530,672

Therefore depreciation expense for the year ended December 31, 2021 is $530,672.